Mortgage company withholding insurance proceeds

Question

We recently lost our home due to fire and smoke damages. Our insurance company has estimated the replacement cost to be $161,000.00. The mortgage company has released $40,000.00 (the maximum amount they will release) to us, to begin the tear out & re-build. However, they will not release more money until we are 50% rebuilt. How is a consumer able to rebuild to 50% on a $161,000.00 project, with $40,000.00? This means we, or a builder or the material vendors would have to finance $120,000.00 while the insurance, that we paid for, sets at the mortgage company.

We totally understand the mortgage companies need to protect their collateral and welcome them overseeing the process, through whatever documentation, incremental disbursements, inspections, etc. that are required. My question is, how do you rebuild a home, without the money to rebuild the home? I ignorantly thought that was why we paid for insurance.

Answer 1

Have you found a general contractor to rebuild your home?

I would imagine that someone with a bit of expertise in the area is used to dealing with insurance companies, floating the money for a rebuild, and hitting the gates to receive payment for work accomplished.

Business are used to not receiving payment when work is accomplished and it is part of the risk of being in business. They have to buy materials and pay employees with the expectation of payment in the future. Much like workers go to work on a Monday for the work that day, three Friday's later, business often have to float costs but for longer periods of time.

If you are looking to be your own general contractor then you will have to float the money on your own.

The money should not be used for living expenses or mortgage payments, it should be used for down payments in order to get the work of rebuilding started.

Answer 2

My question is, how do you rebuild a home, without the money to rebuild the home? I ignorantly thought that was why we paid for insurance.

The reason that you have insurance is so as to keep the mortgage lender from losing money. That's why you buy the insurance through the mortgage lender and they get paid. Without the insurance, you'd have no home but still have a mortgage. You'd either have to pay off a mortgage with no house or have to declare bankruptcy to shed the mortgage.

You essentially have two paths. If you (or the builder/suppliers) can afford to float the cost, you can rebuild the original house. You'll eventually get the $161,000 and can pay off the builder and suppliers. This may involve taking out a construction mortgage to refinance the original mortgage. Presumably the construction mortgage would be with a different lender.

The other path is that you can sell the existing property as is, and use the insurance and proceeds to pay off the existing mortgage. Then you'd have no house and no mortgage. You start over and buy a house with a mortgage.

It's possible that your insurance payoff isn't enough to pursue either path. Then your option is to get the insurer to make a bigger payoff. This may involve suing them. Note that you may be able to talk the government into suing the insurer for you. They do have regulators who can review things. If you can't get government action, there are lawyers who will do the suing and take their fees out of their winnings.

Answer 3

Fire insurance, as you have discovered, is a complete ripoff. Most people pay fire insurance all their lives with no benefit whatsoever, and those such as yourself who are lucky enough to get a payout find that it is completely insufficient to replace their loss. I once computed the actual beneficial net present financial value of my fire insurance policy and it came out to $40 per month. The cost was $800 per month. That is typical. Homeowners pay $500 to $800 per year for something that is worth $30 to $50 per year. Ironically banks would actually make more money from mortgages if they did not require mortgagees to buy insurance, but nevertheless they insist on it. It is not about logic, but about fear and irrationality.

When I paid off my mortgage and gained ownership of my home the first thing I did was cancel my fire insurance. I now invest the money I would have wasted on insurance, making money instead of losing it. Being compelled to throw money down the toilet on fire insurance is one of the hidden costs of a homeowners mortgage in the United States.

In your situation, the main option is to borrow the money to rebuild the house using the land as collateral, if the land is valuable enough. Of course, you still owe the money for your original mortgage on your now (non-existent) home. So, to get a home, you will have to have the income to service two mortgages. A loan officer at a reputable bank can tell you whether you have the income necessary to support two mortgages.

If you were maxed out on your original mortgage, then you may not have enough income and you are screwed. In that case you will have to go back to renting and gradually paying off your old mortgage.

(If it were me, I would sue the insurance company pro se as a way to get the necessary money to rebuild the home, because insurance companies roll over like a $20 hooker when they get sued. Juries hate insurance companies. But I am unusual in that I love courtrooms and suing people. Most people are terrified of courtrooms though, so it may not be an option for you.)